The plaintiffs were liquidators. In winding up a company they suspected the directors had caused the company to trade while insolvent. The liquidators sued the directors for the insolvent trading. The directors were insured for this type of claim by CGU, but when the directors passed the claim onto CGU, CGU denied liability.
The directors would normally start their own proceedings against CGU so they aren’t left out of pocket. However, in this case they didn’t because they were staring down the barrel of bankruptcy themselves and had no interest in the outcome of any proceedings.
The liquidators applied to the court to have CGU joined to the proceedings. This was an unusual move because the liquidators didn’t have any contract with CGU. The contract was between CGU and the directors only and as a general rule, only people that are parties to a contract have the right to sue on it.
The court sided with the liquidators and added CGU as a defendant to the proceedings. If the liquidators won against the directors, the court would then examine the insurance contract to see if, in turn, the insurer was liable to the directors, and ultimately, to the liquidators.
Not surprisingly, CGU appealed, claiming that it was a stranger to the liquidators and that it should not be added to the proceedings.
CGU’s appeals in both the Court of Appeal and then the High Court were dismissed. The Court of Appeal said that in circumstances where an insured becomes insolvent and leaves behind an unpaid claimant to whom an insurer can respond, the situation becomes different from an ordinary private contract.
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